Fish - Kerplunk - Kerchunk: what did you buy?

As a present buyer of businesses, I always try to keep a keen eye on the market.

The first thing I did was build a virtual team of professionals around me, so I had the required support. One of things I looked for was professionalism, but the other was a gut feel, a "this doesn't feel right" instinct.

The first problem in buying a business is valuation - what is it worth? Much as though a professional can teach you how to value a business in around 5minutes, the price often depends on other factors - more often, what the seller wants to do next. "I want to appear on Grand Designs," "I had a bet with my mate I could sell my business for more" and "that's the cost of the Italian marble tiles for my villa in Spain" are real reasons given to me in the last two years as to why the business being sold is worth more than the professionals value it at.

But, under valuation can be as big a problem for the unwary as over valuation - why would someone undervalue their business, why would they want a quick sales process?

One of my daily reads are the alerts from the various internet postings boards for businesses for sale - in fact, that's probably the best one for the UK. A few months ago, an alert came up on my daily eMail for a business which was selling for circa £15k, but offered an income of £80k+ in the first year. So, out of curiosity and knowing it was a business in the "adult entertainment" sector - not something I want to get involved with, but my curiosity took the better of me - I wondered what would come back. After a few months, nothing came back, so after seeing the advert was till live and a chat with a friendly business agent (good one's are hard to find - most can be classed as incompetent estate agents), I rang Businesses For Sale head office.

The guy who answered me was very helpful and efficient, and told me that yes the business was still for sale, and had proved popular with 259 live enquiries...... at this point, my head starts swirling like a calculator, and thinks 259 x £15k is a lot of money...... and then guy then says: "He's on holiday at the moment on the second leg of his world tour!" No wonder!

So, here's how his business sale to his buyers works......
1. He sets up a premium rate 0901 adult chat service. Charges are £1/min plus, while income to arranger is 60p/min+
2. He agrees to take out a series of adverts in adult magazines, buying whole pages. There is an effective 20% lump per charge rate between whole pages, half pages and quarters
3. He sets up a series of websites, advertising the services. The content is exactly the same per website, its just the 0901 numbers which are different. Again, website to server to rack differences are around 20%+ lump charge - he buys a rack
4. He now sells a package to his buyer of chat lines (using different 0901 numbers but the same chat service: £1/min to punter = 40p/min network provider, 15p/min to our seller and 45p/min to the buyer
5. He sells the package of quarter page adverts/websites as well, making a 40% margin on each sold

In other words, the £15k buying charge is virtually gross bottom line profit! It probably is after the first 25 sales.....

But here's the caution, and why I have no concerns about showing you his model: the punters are wise! There are adult chat boards on which punters tell other punters looking for such a service which are the "real" services and which are the same old things re-marketed under a new name. So the buyer has bought something which may have created £200k of income a few years ago when it was "new," but now will generate - nothing but a whole of up to £15k in his bank account; while the seller plans the next stage of his world tour.

Businesses may be different in sector, but the old rules of valuation, originality and market development still apply - which ever business you are in. And there are still many happy to separate a fool and his money